The global stock markets are today facing one of the most challenging events in history. The spread of COVID-19 has shaken the financial markets which capped off a quarter of major losses unrivaled since 2008. Although a resilience shown throughout January and February, the transaction markets slid over the past month wiping out their gains for the year and the hopes of a dealmaking-full 2020. The sizable fallout from COVID-19 is now being priced in on the global economy as more and more countries are taking strict measures to combat the pandemic.
In these times of uncertainty, as corporations are focusing their efforts on maintaining their businesses and keeping their employees, the current situation will weight high on M&A and Capital Raising activity. Since it is directly affected by what goes on with capital markets and the real economy, we will probably see significant trend changes in the country and region this year.
Considerations Made On M&A And Capital Raising Activity Post Covid-19 In Tunisia
Since 2018, M&A and CR activity have been growing at a regular pace following a consolidation dynamic. From this perspective not much will be changing post COVID as the crisis showed that SMEs in Tunisia were struggling to survive in these hard times. Business owners will seek financial or bigger strategic partners to help them establish stronger foundations for their companies.
What can be interesting about this period is that this general turmoil might be creating opportunities for the players that have enough capital under these challenging market conditions. The current situation will push business leaders to look beyond their core business in the aim of de-risking through increased M&A activity. If their industries are being hit strong by the crisis, establishing strategic alliances and partnerships can resolve some of their short-term problems.
As the measures taken by the Tunisian government are slowing down the economy, value chains are being dislocated and companies are finding it hard to keep up. Some of them will be turning to the spin off solution while others, solid and well positioned, will want to integrate part of their supply chains. What might also be observable is a horizontal expansion dynamic to create stronger pure players especially in sectors that have proven their importance during the crisis.
In these pandemic times, the weaknesses of the Tunisian economy are starting to show, and the reality of Tunisia’s economic fabric is hitting hard. Companies were not ready for a habits’ shift but the migration of several activities towards online solutions will be the next move for them. The health sector will also continue its consolidation and expansion as the shortage in medical supplies and devices have proven the fragility of the sector. Education and distribution are sectors, among others, that might create momentum in the M&A activity benefitting from the needs created in the times of COVID.
Covid-19’s Impact On M&A Processes
In such circumstances the Deal completion process becomes a series of complex tasks to carry out. Starting with the added difficulty to deal origination, normally it is the result of face-to-face meetings. Then, there is the real challenge of executing due diligence processes. Additionally, when looking at the financing side, there will for certain be an effect on the cost of capital and the ability to access capital markets for some acquirers and issuers. Lastly, negotiations around the deals’ conditions will become more challenging particularly when it comes to valuation. The crux of every negotiation will be to strike a proper balance between prices expected by sellers and prices proposed by buyers. Negotiating will be, at least for the next few years, all about Material Adverse Change clauses and how to price the deal around them.